Thursday, 20 April 2017

Net rental losses lowest since 2003-04

Thought I'd wait a few days for the usual salvo of BS concerning the subject of negative gearing to be detonated and then subside before trying to present a more comprehensive view.

The below figures are rounded, and are sourced from the recently released Australian Taxation Office (ATO) statistics for financial year 2015.

Firstly, it is immediately obvious that property investment is hardly the purview solely of the wealthy in Australia.

In fact well over 2 million Aussies declared an interest in a rental at 2,047,000, with 1,277,000 of them declaring a net rental loss after accounting for on-paper depreciation or capital works deductions.

As expected overall net rental losses declined thanks to lower mortgage rates, but in the event only by 2.3 per cent in falling to $3.628 billion, which is the lowest figure since 2003-04.

The average deduction for a net rental loss claimed in FY2015 was $8,700. This figure is not tax effected, so we are hardly talking big numbers here.

1.47 million investors owned just a single rental property, and a further 384,000 owned just two, these cohorts accounting for more than 90 per cent of investors.

This reflects that Australia has comparatively few professional or institutional landlords.

9.7 per cent of individuals claimed a net rental loss in the tax year, spread widely across all income brackets.

Negatively geared property is evidently popular with those with a taxable income over $100,000, but so it is too for those with a taxable income of under $80,000 (some of these are likely to be retirees, or spouses of higher earning partners).

807,500 Aussies with a taxable income of under $80,000 declared an interest in a negatively geared property, or more than 63 per cent of the total.

Negative gearing is clearly popular across all age ranges. About half of those claiming a loss were aged under 45, while in retirement most are expected to be earning a profit from their rentals.

The largest net rental losses tend to be seen around the peak earning years, perhaps implying that reducing taxable income is as big a driver of negative gearing as price speculation.

So far, so unremarkable, since it's abundantly clear from these data that negative gearing is used across all income brackets and age ranges.

Some of the most popular occupations for owning a rental property included nurses, general clerks, accountants, primary school teachers, high school teachers, general managers, electricians, police, and truck drivers, among others.

In other words, a wide spread. Not that anyone working in the industry needs to look at data to know this.

Who benefits the most?

Why, then, the controversy?

Opponents of negative gearing legislation often argue that most of the benefits are deducted by wealthier investors.

And in a strictly numerical sense this is of course true, in the same way that all tax exemptions and concessions benefit the wealthy (incidentally, wealthier investors recorded the largest taxable rental profits too).

The reason for this, naturally enough, is that Australia has strongly progressive income tax bands, so that a person earning $400,000 does not pay 10 times as much income tax as someone earning $40,000 (in fact, they pay more than 33 times as much, at more than $165,600).

Take the example of a surgeon, an occupation which according to the ATO data has an average taxable income of close to $400,000 (actual: $377,074), but on average might reduce their tax by up to $4,000 (actual: $3,586) thanks to negatively geared investments.

Technically they have saved 'more' tax than a lower income earner can ever hope to do, but this is precisely because he or she pays such a huge amount of income tax in the first place.

Proportionately, of course, the relative benefit as a percentage of income accrues considerably more to the lower income earners who can realistically hope to get ahead by investing in property.

Provided, that is, that they don't buy a property which declines in value, which is a whole other story!

Finally, a monumental hat tip to Cameron Kusher of CoreLogic who aggregated much of the above data from the Australian Taxation Office in double-quick time. Bravo!